Right Thinking from the Left Coast

Tag: Seattle

For years, the Left Wing has been agitating for hikes in the minimum wage. When conservative and libertarian critics have pointed out that raising the minimum wage increases unemployment, they respond that “studies” prove this not to be the case (said studies usually being deeply flawed and having little connection to reality). As I’ve said before: you’re going to have to go a long way to convince me that the law of supply and demand is magically suspended when it comes to wages.

Seattle’s $15 minimum wage law goes into effect on April 1, 2015. As that date approaches, restaurants across the city are making the financial decision to close shop. The Washington Policy Center writes that “closings have occurred across the city, from Grub in the upscale Queen Anne Hill neighborhood, to Little Uncle in gritty Pioneer Square, to the Boat Street Cafe on Western Avenue near the waterfront.”

Of course, restaurants close for a variety of reasons. But, according to Seattle Magazine, the “impending minimum wage hike to $15 per hour” is playing a “major factor.” That’s not surprising, considering “about 36% of restaurant earnings go to paying labor costs.” Seattle Magazine,

According to the Washington Restaurant Association, restaurants currently spend 36% of their income on labor. This hike could send that as high as 47%. Very few businesses operate with that massive a profit margin. They either have to fire employees or raise prices to compensate.

Restaurant owners, expecting to operate on thinner margins, have tried to adapt in several ways including “higher menu prices, cheaper, lower-quality ingredients, reduced opening times, and cutting work hours and firing workers,” according to The Seattle Times and Seattle Eater magazine. As the Washington Policy Center points out, when these strategies are not enough, businesses close, “workers lose their jobs and the neighborhood loses a prized amenity.”

Right now, this “grand experiment” is producing panic. We’ll see how things look in a year. Keep in mind that increased prices will move many of the poor out of the city completely, which may dim the impact of this on paper. But even with that cushion, this is looking very bad.

Seattle is about to raise its minimum wage to a staggering $15 per hour. The deal is being touted as a cooperation between labor and business. However, that deal was basically extorted by the local government:

With his Income Inequality Committee failing to reach a decision at its final scheduled meeting April 23, and business and labor representatives still at odds over core issues on a deal for a $15 minimum wage, Seattle Mayor Ed Murray gathered the business members of the committee the following day.

Unless they reached an agreement with labor, he told them, he would announce a plan worse for them — and more closely resembling Socialist City Councilmember Kshama Sawant’s pro-worker initiative.

But Murray didn’t announce his own proposal April 24. He stood before a room packed with local and national media and said while there was broad agreement, there were unresolved issues.

One week later, Murray returned to the same conference room in City Hall to announce a historic agreement between business and labor to raise the city’s minimum wage to $15 an hour over five to seven years.

The negotiated deal calls for a three- to seven-year phase-in, with large businesses — those with at least 500 workers — required to reach the $15 wage first.

As you can imagine, the usual suspects are crowing, claiming this will inject half a billion dollars into the local economy (since we all know that wages can be raised with money grown on trees). I find this claim to be ridiculous. All the minimum wage will do — as the minimum wage proponents themselves so often note — is redistribute income. It will not create income on its lonesome.

But even that comes with a price. With this wage hike, Seattle will have a higher minimum wage than any country in the world.

Any plan that makes hiring a worker more expensive than in France should be cause for concern. We know that businesses in high-wage countries are especially eager to replace workers with software. Fast-food restaurants in Europe, for instance, have been some of the earliest adopters of labor saving technologies like digital kiosks where customers can order. Those innovations are already beginning to make headway in the United States. But by passing a $15 minimum, Seattle would risk speeding the process up within its city limits.

Liberal rag the New Republic, while supporting the minimum wage hike, is honest enough to note at least three negative consequences: employers will hire fewer workers; employers will replace employees with computers and employees will be priced outside of the city.

It is entirely possible that as Seattle’s new minimum wage proposal takes effect, the poverty rate within the city limits will decrease. What remains to be seen, however, is if the new proposal decreases the poverty rate by raising the market incomes of low-wage workers currently residing in Seattle or if it instead prices some number of less-skilled women and men out of Seattle’s housing market by reducing their market incomes, either by forcing them to exit the city’s formal labor market to seek lower-wage employment in neighboring jurisdictions or by encouraging local employers to reduce work hours.

A question for the class: what businesses pay the minimum wage? The discount and low-price businesses that the working poor and middle class utilize most often, such as fast food restaurants. So what’s going to happen when the minimum wage is raised? The cost of living for Seattle’s lower classes will go up massively. It won’t go up for Seattle’s upper class since their preferred stores are expensive anyway and pay high wages.

The result will be, as Reihan has documented, poor people moving to areas that have lower minimum wages so that they can afford to live, then commuting long ways to areas of higher minimum wage. I don’t see that having to maintain a car and commute a couple of hours every day improves their lifestyle.

However, while this is an even trade of money from one group to another, one specific source of money actually shrinks.

The lost money is federal government benefits that low wage workers lose thanks to the increase in the minimum wage. In fact, many of these workers will lose food stamps, some or all of their earned income tax credit, and other means-tested federal benefits. This money is currently spent in the local economy, but after the minimum wage is increased the money will revert to Washington, D.C., to be spent on something else.

As I showed in an earlier column, low wage workers can lose as much as half of any new income to increased taxes and lost benefits. Given the percentage of low wage workers that live in low income households (around 30 percent) and that eligibility for the earned income tax credit extends to about $50,000 for a family of four, the loss to the Seattle area economy is likely on the order of $75-100 million.

We’ve talked about this before: how the federal tax and welfare systems have created massive effective marginal tax rates for those attempting to climb out of poverty. So the notion that this is a straight-up cash dump into the wallets of poor people is incredibly misinformed. At least half and probably more of that money will swirl right out of the bottom of their wallets in the form of reduced government subsidies. And the rest will vanish with increased prices and long commutes. Reducing people’s dependence on government is a good thing, of course. But let’s not pretend they’ll have more money.

Some people are saying that this will be an interesting economic experiment to test the effect of raising the minimum wage. I’m dubious of that. First, people are not economic lab rats and shouldn’t be treated as such. Second, I am sure that the books will be cooked on this experiment. When poor people flee Seattle to live in places they can actually afford, this will give the appearance of a more prosperous city. It’s the same logic by which a city reduces its poverty rate by using imminent domain is used to force poor people to sell their homes to rich people.

Oh, well, could be worse. Down in California, some fools want to raise the minimum wage to $26 an hour.